The effect of the October Rule changes will ripple through coming months.

October 2015 has seen some significant changes to the UK Insolvency regime by way of changes to the Insolvency Act, Insolvency Rules and the professional guidance by which we operate.

Many of these changes are seen as good, some not so good and other remain entirely to be seen - how the legislators envisaged some of the provisions panning out is really not that clear, which means 2016 is probably going to be rather interesting. 

So, from a creditor’s perspective, what’s the big deal?

Remuneration

A big change for IP’s are the new rules relating to agreement of fee levels. Until October 2015 the majority of practitioners based their fees on time costs and this was the industry norm, although there has for some time now been provision to base fees on a percentage of realisations, a fixed fee, time costs or a combination of those bases.

Those options remain, but now where the practitioner seeks fees on a time cost basis, an estimate of those costs has to be given and this acts as a limit on fees that can be drawn until creditors approve more.

For creditors this is going to mean a few things - the first is that the new process is not straightforward and the fee reports and proposals that have been “tested” by practitioners so far have run to many, many pages of text and workings in order to comply with the letter of the law. Not thrilling reading by any means and we have to wonder if the average creditor is likely to want to spend time digesting an additional barrage of documentation to plough through or squint at online.

We may see a rise in the number of committees and probably an increase in the number of practitioners proposing fees based on fixed or percentage of realisation bases where the burden of information provision is much lower.

There are going to be further changes next year which will provide that meetings of creditors will only be held when requested by creditors.  An effort to save costs no doubt, but this will mean that creditors will have to deal with fee resolution by correspondence, which does not really sit very comfortably with the current thrust of the profession to improve creditor involvement and participation, so some mixed messages coming across.

Assignment of Claims

Another major but quietly stated breakthrough for creditors is the ability now for a Liquidator/Administrator/Trustee to assign claims to third parties that previously vested only in the appointed IP and were therefore incapable of assignment. Claims such as wrongful trading, transactions at undervalue and preferences can now be assigned for value to third parties. 

This will generate an immediate income to the case by way of assignment premium and relieve the estate of the burden and risk that costs might be incurred and be irrecoverable, but it will also deprive the estate of the overall benefit where a claim succeeds.

This might result in creditors that can afford to do so taking assignments of claims and reaping the benefits; consider this in light of the above, where you have a major unsecured creditor that is able to control voting on remuneration and you could have a scenario where that creditor is able to refuse the Liquidator’s proposed costs for dealing with a claim and then engineer an assignment due to the limited options available at that time. It is not clear what recourse the unsecured creditors in the minority have in such a scenario.

The changes are likely to spawn an industry in funding of such actions and creditors should be braced for approaches from funders - a strange side effect is that unsecured claims in a Liquidation might even become a tradeable commodity…

Administration Extension and Payment to Creditors

A welcome change for creditors and practitioners alike is the ability now for Administrators to make a dividend to unsecured creditors out of the prescribed part and for the duration of Administration to be extended voluntarily for up to one year (up from 6 months). This will mean that administration costs of having to put the company into liquidation or seek permission from the Courts to distribute funds will be avoided, which should enhance the returns to creditors.

Generally this is a thumbs up for creditors, although it would have been nice to see it go a bit farther, as the provision only extends to prescribed part monies, meaning that if there is a surplus of “free” monies the company will still have to be liquidated.

In summary, whilst we can see the good intent behind some of these changes, the practical and unintended implications are potentially far reaching and have the potential to reshape the insolvency landscape considerably.

Danny Allen
Senior Manager

 

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